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The Car and Truck Fleet and Leasing Management Magazine

The Impact of Seasonal Price Patterns on Fleet Returns

September 2015, by Paul Fortin

Image courtesy of iStockPhoto.com. 
Image courtesy of iStockPhoto.com.

Automotive industry experts historically operated with the understanding that, in the used-vehicle secondary market, prices were influenced by seasonal variables. However, many legacy assumptions are no longer accurate in today’s market.

Trusted assumptions have dissolved over time. This is because used-vehicle auctions have evolved, auction transaction data capture and reporting methods have improved, and market value estimation models have become more sophisticated. As buyers and sellers have adjusted to leverage these industry advancements, seasonal price patterns have also adjusted accordingly.

At a Glance

For a fleet manager to maximize used-vehicle retention, secondary market seasonal price patterns that can be leveraged need to be understood. Factors that influence these price patterns include:

  • Tax refund timing.
  • Extreme weather seasons or events.
  • Holidays. 

Shaping the Used-Vehicle Market

Currently, an independent used-vehicle dealer looking to purchase inventory can easily perform the following functions via the Internet without leaving his or her office:

  • Obtain accurate market valuation estimates. 
  • Analyze past auction transaction data. 
  • View comprehensive auction inventory photos and condition data.
  • Secure financing, bid on, purchase, and arrange delivery for vehicles. 

By contrast, 20 years ago, this same dealer had to dedicate hours for preparation in addition to braving the elements to travel to the auction to perform the same functions.

Understanding Secondary Markets

Price levels in any free market are driven by two variables — supply and demand. The used-vehicle secondary market is a wonderful illustration of this price setting mechanism in action.

On a daily basis, tens of thousands of vehicles are sold through a bid-and-ask pricing process, at both physical and online auctions. Here, supply-and-demand variables are the sole determinants of price. Every buyer and seller participating in the market — usually without realizing it — is influencing longer-term market pricing levels at all auctions. They do this by impacting both current and future prices with their buying or selling decisions on a single transaction.

To illustrate how supply and demand drive price levels in the used-vehicle market, the “Charting Supply & Demand” graphs show how price is impacted when a shift to supply or demand occurs.

These scenarios only show how a price increases, but, when the opposite shift to supply or demand occurs, the inverse outcome will occur and prices will decrease.

Forming Seasonal Price Patterns

Pricing patterns occur when data is available and transparent, resulting in linkages between transactions across auctions and time periods. If these trends are aligned to repeating or calendar-based variables, seasonal trends emerge that are important to understand.

For example, if more buyers enter the market in January to build dealer inventory, as long as supply is constant, the increase in demand will drive prices higher. If this January phenomenon is based on some fundamental driver, and occurs every year, a seasonal price pattern increase will emerge.

Reviewing year-over-year trends over each quarter from 2012 to 2014 shows that auction volume trends remain relatively stable.Courtesy of LeasePlan USA. 
Reviewing year-over-year trends over each quarter from 2012 to 2014 shows that auction volume trends remain relatively stable.Courtesy of LeasePlan USA.

Although used vehicle demand is driven by many industry and economic variables, seasonal demand is attributed to a limited number of factors:

  • Tax refund season. Most used-vehicle buyers today require financing with down payments. Income tax refunds are a common source of these down payments. As dealers made the connection between increased demand around income tax refund season, they began increasing inventory ahead of the retail demand through auction purchases. This, in turn, drove up wholesale demand and auction prices.
  • Weather. In certain parts of the country, weather extremes can limit retail activity at dealerships and related auction activity. Weather trends can also impact demand for individual vehicle segments, such as pickup trucks or cargo vans used in building and construction industries. Major weather events, such as hurricanes or major snowstorms, are also disruptive to both demand and supply, resulting in volatile price fluctuations.
  • Holidays. Periods leading up to major holidays can also adversely impact auction activity as dealers manage retail inventory levels accordingly. 

Quantifying Seasonal Price Impact

By utilizing a proven market valuation model1 as an annual baseline for measuring retention and comparing it to actual LeasePlan auction sales results, the seasonal price fluctuations can be easily identified and, more importantly, quantified.

Although the annual baseline used in this analysis varies slightly from year to year, over the past three years it averaged 100.4 percent, which indicates the auction sales amount for LeasePlan units averaged 0.4-percent more than the applicable market value guide estimate.

The analysis clearly shows that, during certain periods, the actual auction sales
retention percent consistently trended well above the full-year average. In other
periods, proceeds consistently trended below the calendar-year average. Green and red bands highlight the “good” and “bad” times to sell vehicles during a full-year seasonal cycle.

Using the last three years as a predictor of future behavior2, late first-quarter and early second-quarter auction sales realized an average 5-percent peak premium over the annual baseline. On the other end of the spectrum, third-quarter sales resulted in the lowest price attainment with an average sales price around 2-percent below the annual baseline.

The four graphs above illustrate how supply and demand drive price levels in the used-vehicle market, and how price is impacted when a shift to supply or demand occurs. Graphs provided by LeasePlan USA. 
The four graphs above illustrate how supply and demand drive price levels in the used-vehicle market, and how price is impacted when a shift to supply or demand occurs. Graphs provided by LeasePlan USA.

Using Seasonal Patterns to Maximize Returns

In practice, leveraging seasonal patterns can be challenging. Disposal timing can be an inexact science due to:

  • Manufacturer order-to-delivery timing.
  • Termination-to-disposal timing. 
  • Individual fleet policy and practices.
  • Operational, financial, and budgetary restrictions. 
Data provided by LeasePlan USA.
Data provided by LeasePlan USA.

To maximize the seasonal benefit, a fleet manager should align replacement order timing to the best of his or her ability. This can be done by ensuring the existing unit is sold at auction during the periods that historically have experienced the highest seasonal price benefit: late first quarter/early second quarter. In addition, a fleet manager should avoid periods that historically have the lowest benefit, such as the third quarter.

A word of warning: fleet managers shouldn’t hold onto vehicles to get the best seasonal benefit.

Alignment of replacement timing does not mean “holding” a grounded vehicle for sale for an extended period of time. This strategy is not prudent as “time only” depreciation averages around 1 percent per month. So, over a few months the normal, time-only depreciation will introduce risk into the equation and quickly offset any seasonal benefit.

Editor's note: Paul Fortin is the economist and vice president of strategic modeling and analytics for LeasePlan USA. He can be reached via e-mail at [email protected]

Footnotes:

1Model: The annual baseline utilized for this analysis was derived from LeasePlan's proprietary market valuation model (LeasePlan Market Value Guide). This statistical model was created in 2006 and consistently delivers an annual benchmark within 1 percent of LeasePlan USA actual market proceeds. 

2Behavior: Past performance does not guarantee future results, and, although this pattern has been observable for over five years, changing supply or demand dynamics can shift (or eliminate) the historical seasonal price fluctuations. As an example, if next year consignors push 40 percent of their auction sales into the first quarter, as compared to a historical average around 25 percent, prices will fall accordingly and the first quarter seasonal benefit will no longer exist. LeasePlan’s Strategic Modeling and Analytics Research Team monitors and measures this secondary market phenomena closely, and will provide any relevant information if major deviations from the present state occur.  

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